Speaker 1The fallout of the Jensen affair continues, and its blast radius is certainly not limited to NVIDIA or even AI. It's clear that as the lame duck session of Congress begins, this is being seen as a key inflection point to make some key shifts in geopolitical priorities. The AI Daily Brief is a daily podcast and video about the most important news and discussions in AI. All right, friends, quick announcements before we dive in. First of all, thank you to today's sponsors, KPMG, Robots and Pencils, CDATA, and Blitzy. To get an ad-free version of the show, go to patreon.com slash AI Daily Brief, or you can subscribe on Apple Podcasts. And lastly, one update on the new show, How We Got Here. You might have heard me mention how every week, in addition to the main episode, which is the full-length deep dive on some important phenomenon, I will also be doing a counterpoint episode. And the idea of the counterpoints are pretty simple, to create a space for people to disagree, or point out things where they feel like I haven't gone far enough. It's a way for people to come into the conversation. I've just posted the first counterpoints for How Tech Lost America, and I'm really excited to see what you think. So go look up How We Got Here with NLW, and send me some notes about what you think. Welcome back to the Jensen Daily Brief. We are continuing to examine the seismic reverberations in the wake of Jensen Huang's resignation from NVIDIA. Although, as we'll discuss today, calling it a resignation, I think, doesn't quite do justice to exactly what has happened. Hold aside all of the more speculative theories about whether there was some coordinated campaign behind this, and the timing of it, and all that stuff that was part of the show yesterday, even without describing any strong intent or devious machinations in that way, this still feels like the opening salvo of a very new period in Washington, where the Democrats are starting to assert their power, both in terms of their foreign policy, as well as in terms of their desire to bring powerful private market action. And where the China hawks are increasingly ascendant. It looks, in other words, in some ways, like Washington fired Jensen. Which does not mean that he will no longer have any dealings with Washington. Following Huang's resignation on Thursday morning, Chairman John Moulinard released a statement on behalf of the House Select Committee on China. It stated, Jensen Huang's firing from the company he founded is an unfortunate end that could have been avoided. It is in our national interest for NVIDIA and our other AI champions to succeed, but American companies should not be able to do so. American companies should never jeopardize our nation's security by giving Chinese companies access to their most advanced chips. NVIDIA must now change its corporate practices and appoint leadership that makes national security its top priority. In Congress, we must act quickly to pass bipartisan export control legislation. Now, on the one hand, I don't think that we should be overly obsessed with close textual analysis of a comment coming right on the heels of a big event. But the idea that a private company's top priority is national security, as opposed to, for example, their fiduciary responsibility to their shareholders. It gives you a bit of a feel and flavor for the struggle around power rebalancing that I think has opened up. The events of this week have certainly given China hawks a huge amount of ammunition to push through reform. The New York Times broke the story as lawmakers were returning to Washington following the midterm break. And while chip controls were already on the agenda for the lame duck session, expected to be attached to the must-pass National Defense Authorization Act, the scandal around Jensen and NVIDIA has vaulted these issues to the top of the agenda. One congressional aide told Politico earlier in the week, The Democrats will now push for even tougher restrictions and feel they have the momentum to get it done. That aide said, Republicans who've been nervous about crossing the White House on this know the next version gets written by Democrats if they don't deal now. Indeed, following Huang's resignation, the sentiment in Washington has become even more hawkish towards Chinese chip bans. House Speaker Mike Johnson said on Thursday, I think there's a developing consensus in Congress that this is an important position to take, especially given in light of recent developments. I think it might change a few minds. Senate Majority Leader John Thune said that passing chip controls was becoming a high probability. House Foreign Affairs Chair Brian Mast, who is sponsoring one of the three chip control bills, said that the events of the past week have, quote, 100% boosted the chances of all three being passed. He also flagged that the White House is playing ball, commenting, Stuff that we're pushing through, we're getting direct assistance from the White House. I'm not going to elaborate too much on it. Now, to better understand, broadly speaking, the two positions when it comes to the China question on AI, an exchange between Gavin Baker and Dmitry Alperovitch is a fairly good summary. Atreides Management Managing Partner Gavin Baker wrote, Well-meaning, patriotic China hawks, who are not AI experts, are putting American national security at risk. China had zero chance of ever catching America in AI with the export strategy that Jensen supported. Their labs would have continued training using less powerful American GPUs, which meant American labs would have always been ahead given scaling laws. And in the event of a conflict, we could have simply turned off all the Southeast Asian clouds. Simply stated, in AI terms, America had machine guns and we were giving China muskets to prevent them from developing their own machine gun variants. Given that it looks like the China hawks will get their preferred policy, China will likely soon have a chance of catching America in AI by going down an alternative, less power-efficient AI hardware path. They almost certainly would not have gone down this path if less powerful GPUs were still available in China and via Southeast Asian clouds. And it will be a much less stable world if China is able to catch America in AI. It will be a much less stable world if China pulls even or ahead of America in AI after developing their own alternatives and gives this technology to Russia, Iran, and North Korea. All of this will be possible if the China hawks get their preferred policy. So the idea here, let's call them Scenario 1 and Scenario 2. Scenario 1 is that we sell chips to China, but chips that are not the cutting edge. Basically, they're dealing with a couple generations of technology ago, like the H100s, while we have the much more powerful Vera Rubin system running. What Gavin is arguing is that in this Scenario 1, scaling laws that power the development of AI models means that basically definitionally, if they only have access to those worse chips, they are structurally not able to catch up. That is, of course, barring some huge technological breakthrough, which allows them to train better models with worse chips. But based on the strategies available to the AI model builders now, this is where the machine gun versus muskets analogy comes from. Now, there was an additional benefit that some had pitched to Scenario 1. It was also about the rest of the world running on American hardware and software and the benefits that come with that. So that's Scenario 1. The one that Gavin is still basically advocating for here. I do think it's worth noting that at basically no point did the advocates for Scenario 1, of whom, of course, Jensen was the chief among them, ever articulate it in even as close to a crisp way as I just described it. Maybe they did behind the scenes, but when it came to the public debate for ideas, I basically never saw those advocates pitching selling worse chips to China as keeping them addicted to a worse supply. In other words, they didn't frame it as a better way to compete with China. Instead, their pitch in general was about whether we should be competing with China, which obviously has been a much less successful argument. Now, Scenario 2 is, frankly, much more easy to understand without really understanding anything about AI. And that version of the argument is that if the AI race is, as Senator Jim Banks posted yesterday, all about who has the best and most chips, then, duh, we shouldn't give China any chips. And again, without knowing anything about AI scaling laws, the key technical knowledge that underpins Scenario B, or 2, or whatever I said, doesn't require that knowledge and is therefore easier to comprehend. Now, going back to Gavin's post, geopolitics commentator Dmitry Alperovitch wrote, the great thing is that this is falsifiable. For years, we have tried your way to try to win the race by arming the enemy and got the Chinese models that are so capable that they are less than nine months behind the US frontier ones. Now, maybe we can try the other way, not giving them any compute and see what happens. Sadly, it won't be a perfect test since they already have smuggled in so much NVIDIA compute that can be employed going forward. Now, part of the unspoken argument is that part of the unspoken reality of Scenario B is that in the absence of having formal access to chips, China prioritizes the development of their own domestic chip industry. And that very clearly has been the CCP's position over the past couple of years. In fact, even as the US has flirted at various points with opening up access to NVIDIA chips, Beijing in many ways stood in between its domestic companies getting access to those chips because it wanted them to use domestic chips from companies like Huawei. Hold aside whoever might have been right or is right now about the correct strategy. I think from a political point of view, from a political resonance and narrative perspective, Dimitri's side of this, which is the simplicity of saying it's been a leaky sieve that's given them access to the NVIDIA chip, so now maybe we can try the other way, not giving them any compute, I think is going to be a lot more resonant than the more complex, technical knowledge-requiring Scenario A. Now, beyond the immediate policy goals specifically with regard to NVIDIA's chips, it feels like more broadly, the Jensen affair has galvanized a Cold War mentality in Washington. Earlier in the week, the Telegraph suggested that this is one of the most impactful national security scandals, rivaling the Edward Snowden NSA revelations or Chelsea Manning's document leaks. They wrote, It is hard not to think of the Klaus Fuchs scandal of the 1940s, which shattered the Western nuclear monopoly and helped accelerate the Soviet Union's development of the atomic bomb. NVIDIA's technology is similarly significant to the AI arms race. Now, this position was already somewhat expected from Democrats, who became increasingly comfortable engaging with Beijing as an adversary as the Biden presidency dragged on. You might or might not recall Nancy Pelosi's surprise visit to Taiwan in 2022, which was viewed by the CCP as a direct provocation. And as antagonistic towards Beijing on trade issues, the Trump administration has been, in many respects, the geopolitical struggle between the U.S. and China has simmered down compared to the Biden years. Scott Kennedy, senior advisor in Chinese business and economics at the Center for Strategic and International Studies, said last week, On balance, as a result of the midterms, the Democrats may nudge the U.S.'s China policy in a more hawkish direction through hearings and legislation, particularly on economic security issues and Taiwan. However, he added that efforts would, quote, "be constrained by the executive branch wide range of latitude, and China's growing power and leverage, which can't be easily undone. Some have also pointed out that trying to slow down China by denying them access to chips might be the only way that the Democrats can slow down data structure in the U.S. without surrendering the U.S.'s lead. Gary Ng, a senior economist at Natixis Bank, said, a slowdown in the U.S. could be a win for China. The election results will not bring data center construction in the U.S. to a complete halt, but the pace will definitely slow. This would keep USAI token prices high, giving China an opportunity to export cost-effective inference services supported by abundant electricity supplies. Which puts a whole new light on why it would then be coherent policy to also try to deny China access to chips. Certainly Washington is going to spend the next few months hauling Jensen before a string of congressional hearings. Bloomberg reports that Jensen has agreed to testify under oath in a closed-door hearing later this month, ahead of the Thanksgiving holiday. House Foreign Affairs Chairman Brian Mast told reporters that the hearing would be recorded and transcribed, so there's potential that some of it would be released to the public. There are also slightly mixed messages, as the House Select Committee on China is still threatening to subpoena Jensen, giving him an 8 p.m. deadline to accept the invitation. But one way or another, it seems that Jensen will testify in the House over the coming weeks. In the Senate, meanwhile, Banking Committee Chair Tim Scott has requested Jensen's appearance at a separate hearing on export controls. And Banking Committee Ranking Member Elizabeth Warren seems keen to interrogate. She wrote, Jensen Huang's decision to resign from NVIDIA does not absolve him of the right to do so. Jensen's decision to resign from NVIDIA does not absolve him of the right to do so. Other executives, or the company as a whole, have responsibility for putting our national security at risk or any other potential violation of our laws. They still owe Congress answers. I think one thing that's pretty clear from the subtext of Elizabeth Warren's message is that A, this is certainly not about the affairs, of which a second with an employee, by the way, was reported yesterday. Yes, we were in a situation where somehow that is just a footnote. And B, frankly, not just about Alice Huang as a potential Chinese asset, although that is the broader and real issue, which is whether NVIDIA knowingly contravened export controls. I believe that as they try to drag answers out of Jensen, the focus even more than on what he knew about Alice's potential relationships with Beijing will be about what he knew about Megaspeed giving Chinese companies access to NVIDIA chips. A new study from KPMG in the University of Texas at Austin found that when people work with AI, similar skills don't guarantee similar outcomes. Researchers studied more than 500 early career professionals and found that the best performers consistently amplified the value of AI by guiding, evaluating, and refining its outputs. These top performers, called AI amplifiers, weren't defined by what they knew alone, but by how they worked with AI. Learn more about what separates AI amplifiers from everyone else at kpmg.com slash US slash AI amplifiers. At this point, it's no longer a question of whether companies are actively using AI. Using it well, on the other hand, is a whole different story. Robots and Pencils, though, is a company that I can point to that is actually built for this time. They're an applied AI engineering firm working directly with clients on problems that matter to the business, not experiments that live in a slide deck. Every engagement starts by working backwards from the outcome a client actually needs. If you're trying to tell real AI engineering apart from noise in this space, that's the difference maker. Head to robotsandpencils.com. This episode is brought to you by CDATA, companies rolling out AI keep hitting the same wall. Token spend is climbing, security is holding agents back, and no one knows how AI is truly being used. The root cause? AI is cut off from the systems and context your business runs on. That's why CDATA built Connect AI Gateway, one control point between your AI and your systems. Built on the connectivity layer powering Palantir, Google, Salesforce, and hundreds more, each agent gets exactly the data and tools it needs. It governs down to the record and lets you finally see the data and tools it needs. It's a great way to get the data and tools you need to see your org's complete AI usage in one place. Accurate answers, a fraction of the token cost, and a gateway that learns your business with every interaction. See how at cdata.ai. Blitzy's understanding of massive codebases unlocks autonomous security fixes, modernization, and new features. So what happens when there's no legacy code at all? Greenfield is supposed to be the easy part. Clean slate, no technical debt. But even Greenfield moves at human speed one sprint at a time. Blitzy changes the unit of work from the developer to the project. Autonomous security fixes, modernization, and new features. So what happens autonomously planning, building, testing, and validating entire applications from scratch? Hundreds of thousands of lines of production-ready code. One Blitzy customer stood up a brand new application, 534,000 lines of code, compressing a 65-week roadmap into two weeks. Another shipped an entire application with no front-end engineer. Legacy or Greenfield, the answer is the same. Software at the speed of compute. Build what's next at blitzy.com. That's B-L-I-T-Z-Y dot com. Now, one thing that's not clear yet is the extent to which Democrats want to make this about Jensen and NVIDIA versus go after the bigger prize of Trump in the White House itself. It seems like wherever that lands, the administration official that is most in the line of fire regardless is Commerce Secretary Howard Letnick. Throughout the week, Axios and other outlets have been reporting how Howard Letnick has been slow-rolling enforcement of export controls all year. Rival officials in the administration characterize this as a defiance of presidential orders, painting a target on Letnick's back. Senate Banking Committee Chair Tim Scott invited Letnick to testify alongside Jensen to get the full story. Sources speaking with Politico, meanwhile, were mixed on whether Letnick would actually be fired over the debacle. One said, I don't know if this is necessarily the straw that's going to break the camel's back. POTUS himself was just too directly involved for this to be an easy Letnick is the scapegoat. Another, venting their frustrations with Letnick, commented, this situation is a complete and utter disaster and perfectly encapsulates the last one and a half years of working with Commerce. But again, even Letnick, his sacrificial lamb, may not be enough. Senators Elizabeth Warren and Chris Coons have asked the Trump administration to preserve all documents related to NVIDIA's chip export and Jensen's relationship with Alice Huang and whatever the intelligence services suspected about her ties to China. Warren and Coons cited their roles as incoming chairs of the Banking and Foreign Affairs Committees once Democrats take control of Congress in January. That implies that even if the hearings start soon, we should see them stretch well into 2027 as well. Michael Baugartner, the GOP sponsor for one of the export control bills, said, I sincerely hope Congress isn't going to have to make him switch to prison pinstripes and that we do not find out that his mistress being a Chinese spy led to violation of U.S. espionage or export control law. As we'll discuss in a few moments, while the markets dimension of this story may start to calm down, I think the political intrigue is just heating up. Speaking of which, the narratives are not just flowing in a single direction. CNN is now questioning the narrative that Alice Huang was a Chinese spy at all. On Thursday, they wrote that, multiple sources said the intelligence collected on her to date does not prove she was acting as a spy for Beijing. This followed Attorney General Todd Blanch stating at a press conference that there are, quote, no conclusions reached by the Department of Justice or by me or by FBI Director Patel around who she is or not. President Trump, in an interview with Stephen A. Smith, said, Well, the big thing is, was the woman a spy? And I don't know if that's been determined yet. If the woman was not a spy, perhaps it would be different. Political commentator Aaron Ruppar suggested that this was just the White House circling the wagons and preparing for a fight but the CNN article went further, writing, Some officials at the Office of the Director of National Intelligence have framed the characterization of Alice Huang as a Chinese spy as not entirely accurate and over-torqued. They continued, Officials at the CIA are also not yet convinced that the intelligence collection on Huang to date, including intercepted communications, proved she was knowingly funneling information back to Beijing. Former White House AISAR David Sachs jumped all over this, presenting it as exonerating. He posted, A spy narrative is collapsing already. Is there clear and convincing evidence that Alice Huang was a Chinese spy? AG says no. No conclusions reached. CIA says no. Not yet convinced. Director of National Intelligence says no. Not entirely accurate and over-torqued. Ranking Democrat on House Intelligence incoming chairman says no. Quote, Today, at least, I don't know. This was immediately after he was briefed. Who argues otherwise? Anonymous officials tell CNN, quote, It strains credulity to believe that she was not acting as an agent of the Chinese government simply by virtue of the fact that she is a successful Chinese businesswoman working with one of America's most powerful companies. This is their proof after a year of investigating and surveillance that she was a successful Chinese businesswoman? At this point, the only crime we know for sure happened is the leaking of the classified memo. Who did that and why? An investigation should be opened. Now, to sum, this will be the whole story. A hatchet job based on fear of China and a desire to defang a very powerful private market actor, and everything else is just details. And yet, Ultimately, I think, as I mentioned before, that as these conversations, hearings, and investigations continue, it will start to matter less whether or not Alice Huang was a Chinese spy, and will be more about whether Jensen had knowledge of or even helped facilitate chips smuggling into China. We've had a string of additional reporting that further expands the scope of the operation. Bloomberg reports that they viewed corporate documentation of chips moving from Singapore to a data center in China. They called this, quote, the most explicit evidence yet that an expansive network of Chinese companies with Alice at the center managed to get its hands on smuggled NVIDIA hardware. The information, meanwhile, reports that a network of companies connected to Alice Huang invested in DeepSeek and promised them a steady stream of Blackwell chips. And the Justice Department is now investigating connections between Alice Huang and Supermicro, whose co-founder was charged with chip smuggling back in March. One extremely viral post from X that adds even more intrigue here comes from former OpenAI researcher Will DePue. He wrote, I found conclusive forensic evidence that the top four Chinese AI labs, DeepSeek, Moonshot, Minimax, and Ant Group have built their newest models NVIDIA's most advanced Blackwell chips, which are barred from export to China. Will continues: "This sounds insane, but I discovered that almost every AI model carries a hidden signature of the GPU that trained it. When a model is first set up, the starting values of its weights are laid out in a pattern that depends on the exact GPU. Each combination of GPU and seed numbers produces a unique pattern, the sort of fingerprint of the hardware used to create the model. Traces of that pattern survive training into the published model." Again, this evidence isn't based on any insider information or leaking. It's based on a forensic analysis of the model weights released by the companies themselves. "I searched more than six trillion combinations of chip layout and seed numbers and matched them to OpenWeights models. In doing so, I found conclusive evidence that six Chinese AI models, including DeepSeq V4 Pro, Kimi K3, and Minimax M3, were initialized on NVIDIA Blackwell systems. Four of the models match Grace Blackwell, the GB200 and GB300 parts in NVIDIA's flagship liquid-cooled rack scale systems." Will concludes: "I am highly confident in this result and it has been independently verified by senior researchers at OpenAI and Anthropic." Steven Lubko summed up: "If this is true, it substantially overturns the narrative that China was able to build competitive models using a fraction of the compute. Instead, they were able to use the latest-gen hardware and distillation of top models to run six months behind at cheaper cost." Now, beyond the geopolitics of the story, Jensen's departure of course also raises massive questions about what will happen to NVIDIA and the AI industry as a whole. Inside the company, Jensen seems to have the support of the workers. A memorial has been set up out of the way for the company. Wired reports that an internal post urging the board to reconsider has received 1,600 comments, the majority in full support of Jensen's return. For the moment, CFO Colette Kress has taken the reins as interim CEO, and there's a lot of speculation about how she might govern the most important company in the AI supply chain. Kress has been with NVIDIA since 2013, so she has guided the company's growth through multiple iterations. Now, some big tech CFOs play a moderating role alongside their enthusiastic CEOs. That's the reputation that Amy Hood has built at Microsoft, trimming Satya Nadella's ambitions at times, and keeping the company in a fiscally conservative posture. That is not the role Kress has played at NVIDIA. Sources told the information that she wasn't the one calling the shots, and that Jensen tended to "steamroll" her when they disagreed. And those disagreements could be pivotal to how the AI industry moves forward. For example, the information claims that Kress pushed back on some of NVIDIA's more extravagant underwriting decisions. These included a proposed $250 billion guarantee that would have backstopped 8 gigawatts of compute for OpenAI. The deal was subsequently pared back, with NVIDIA only agreeing to backstop the first half of the build-out for $100 billion. The Wall Street Journal went further, reporting that Jensen was downright dismissive of her input. During a summer meeting as the AI trade was beginning to falter, Jensen interrupted Kress' presentation and said she was a "deer in the headlights." He called her a "reporting CFO," not someone that could help define strategy or market decisions. So while she is not viewed as an ultra-conservative CFO, she is certainly unlikely to stick her neck out as much as Jensen, especially considering the risky bets over the past couple of years when he provided liberal backstops in funding across the entire AI industry. This matters a great deal considering that NVIDIA had become the central bank of the AI industry. NVIDIA has invested in dozens of startups and is cosigning leases across the neocloud space. If they pull back, it could function in a similar way to banks pulling credit during a financial downturn, making further funding to the neoclouds a much more treacherous position. If credit freezes, NVIDIA, as the central bank of AI, is the entity everyone will turn to to provide the backstops. Bloomberg reports that the pressure was already on before Jensen resigned. In August, NVIDIA announced a $500 billion financing vehicle in partnership with six private equity giants, including Blackstone and Apollo. The deal was structured as NVIDIA providing a guarantee on the residual value of GPUs, backing up to 25% of deal size. In theory, this meant that private equity firms could invest in data center buildouts without worrying about chip depreciation. However, no deals have been signed under this agreement, and both customers and private equity partners have called on NVIDIA to raise the size of the backstop. I think keeping an eye on those issues is extremely important, and where we could see some of the biggest long-term effects from Jensen leaving. But at least in the short term, markets seem to be returning to a position of cautious optimism. After losing 20% across the first three days of the saga, NVIDIA found a short-term bottom when the resignation was announced, and traded slightly higher across Thursday's session. This demonstrates once again that there is nothing, no news at all, that can be worse than no news at all. The thing that investors hate most is uncertainty. Meanwhile, outside of NVIDIA, the NASDAQ is green on the week, up 4.8%. While some had argued that Jensen's infidelity would burst the AI bubble, on the contrary, Steve Sosnick from Interactive Brokers commented, "The market mentality is not about assessing risks. It's about seeking opportunities. The mindset is, 'If NVIDIA is out of the way, who wins?'" Patrick Moorhead of More Insight said, "Over the short and mid-term, I don't think this changes the AI trade at all. When I look at the broadcast, and the platforms, and all the startups, I think they can fill in a lot of the cracks that NVIDIA would potentially leave open." So what do we watch for from here? First of all, of course, is the ascent of export controls as an issue in Washington, and whatever get deals done fast on that front. This whole thing seems to have bolstered broader industry support for a hawkish view on export controls. Anthropic has of course been a vocal supporter, but OpenAI had always been noncommittal until this week. Politico is reporting that OpenAI has privately told congressional offices that they support all three chip control bills. Senator Jim Banks, the sponsor of one of the bills, called this a "generational opportunity" to pass bipartisan bills that would address all the pathways through which China acquires chips. He wrote, "While we need a full assessment of the damage done to our national security by recent revelations, we can begin today by setting a better course. No excuses, no apologies. Let's get this done." We are sitting here on a Friday, still digesting this news, and yet never doubt the speed at which new things come along, and we turn away from something even that seemed huge just a few minutes ago. With markets seeming to want to focus on who might benefit from this, and politicians caring more about using it as a way to get legislation pushed through, it feels like this will quickly be a story about looking forward rather than looking backward. Aiding and abetting that will of course be the Anthropic IPO, which is still slated to go off next week. The historian in me does feel like the implications of this have barely begun. But for now, that is going to do it for today's AI Daily Brief. Appreciate you listening or watching as always, and until next time, peace! Thanks for watching!
PodcastTranscript AI